Sorry to budge in… You are given the ff quotes: Spot rates /EUR 1.1865-1.1870 Yen/ 108.1 – 108.2 3-month interest rates (percent per year) in 5-5 1/4 in EUR 31/4 – 31/2 in Yen 11/4 – 11/2 What should the quotes be for the a. /EUR 3-month forward ask exchange rate b. EUR/ 3-month forward bid exchange rate c. Yen/ 3-month forward bid and ask exchange rate Focusing on question a. alone this is what I did: /EUR rate is 1.1870(1 + 0.0525/4)/(1+0.035/4) This is what CFAI did: /EUR rate is 1.1870(1+0.0525/4)/(1+0.0325/4) Why am I wrong?
because you are selling euros and buying . you got the 1.187 right (you hit the ask when you want to buy). for the interest rates, you want to sell eur interest rates (hit the bid) and buy the interest rates (hit the ask).
billywest Thanks for bringing light my path: see how I finally reasoned it out. It is a bit windy but kindly take a look at it for your ‘ok’ so i can take a siiiiiiigh: 1. /EUR 3-month forward ask exchange rate is like buying EUR 3 months from now this is like borrowing the dollar equivalent of a EUR today to invest; this will be worth {1 + R eur bid } in 90 days. (The banks will not give me their ask they will give me their bid) Call this A. This is the same as: 3. borrowing the equivalent of one eur 1.187 today at R ask. To give me 1.187 {1+R$ ask} in 90 days. I convert it to EUR at the forward rate of F to give me 1.187{1+R$ ask}/F eur. Call this B A =B 1.187{1+R$ ask}/F = {1 + R eur bid} F = 1.187{1+R$ ask}/ {1 + R eur bid} Is this thinking jun 7th compliant?
you are exchanging the EUR to $. not the other way around as you stated in 1.
thanks bill